What is FDIC Insurance?

Almost everyone who has walked into a bank has seen, or heard, at some point or another the term FDIC Insurance. This guarantee is provided to most banks, and it covers nearly everyone who has money at a bank. But what exactly is it, and what does it do?

FDIC

The Federal Deposit Insurance Corporation is, simply speaking, a guarantee from the federal government that if the bank were to fail you will not lose your money. Instead of putting your full reliance on the bank, a corporation that could fail at any given time, you are putting your reliance on the government.

The FDIC coverage protects your money up to $250,000 per bank, per individual, per category. What this means is that many people can easily get more than the $250,000 in coverage if they need to. But there are some things that it does not cover.

What FDIC is not

FDIC coverage does not protect a person from investment losses. If I decided to buy 100 shares of XYZ stock, and then the company goes bankrupt causing my stock to be worth nothing, I could not file an FDIC claim to recover my losses.

FDIC coverage does not protect accounts at all banks. True, in the United States, just about every bank and credit union is covered by the insurance. However, there are some that skip this coverage. Legally they cannot claim to be protected, and often they are required to disclose they are not protected, but assuming a bank is covered because they are open for business is not smart.

How to Get Covered

Banks enroll in the FDIC coverage, and they pay the premium for the insurance. For your account to be covered, you simply have to open an account at any given bank that is a member of the FDIC insurance program.

Let’s suppose you are fortunate enough to have over $250,000 in a cash account. If you desire to have coverage for the full sum, you will have to take certain steps. You can always open multiple accounts at multiple banks. But that is cumbersome and if those accounts are earning interest then you have multiple tax documents every year. An alternative is to put the money into a joint account; a husband and wife duo is covered up to $500,000. Or opening more than one category is an option as well. This means you could open an individual account, a trust account, and an IRA account at the same bank.

When a person has so much cash that they are close to exceeding the FDIC coverage limit, the problem is not necessarily how to get all of that cash covered, but rather how to invest it so it will earn a better rate of return. But choosing the right investment is a topic for another time.

FDIC Coverage in a Nutshell

For most people, being covered by the FDIC is automatic. They don’t have to do anything, they will likely never come close to the $250,000 limit, and the chances of their bank failing is actually quite small (although the great recession of 2008 showed that hundreds of banks did fail, including some very large institutions). So unless you have loads of cash, all you need to do is make sure that your bank is a part of the FDIC program; the rest is taken care of internally.